The overdraft facility in a home loan is often confused with the redraw facility. Here’s everything you need to know about overdraft facility.
What is it?
An overdraft is an extension of credit from a lending institution when an account reaches zero. In layman’s term, it is when a bank allows you to withdraw money from an account, even though you have no funds in the said account. Basically, it is just like borrowing from a bank.
Nowadays, many financial institutions offer accounts with such facilities. The amount that has been “overdrawn” is, of course, subject to interest and repayment terms previously agreed upon between the bank and the account holder. Usually, there is a fixed amount as to how much the account holder can access using overdraft, known as “Authorized Overdraft Limit”.
How does it work in a home loan?
When you understand how overdraft works, then a similar feature in a home loan becomes easier to understand.
Working pretty much in the same principle, a housing loan with an overdraft facility enables you to withdraw money you don’t have from an account that is linked to your housing loan. This is despite the fact that you effectively still owe money to the bank (in the form of your home loan). Of course, all this takes place under a predetermined interest rate as well as repayment terms and conditions which have been set by the bank.
Why would the banks allow you to access money you don’t have?
When you utilise the facility in a home loan, you are essentially borrowing against the equity of your property (i.e. kind of like pledging your property to the bank in order to gain access to cash). From the financial institutions’ point of view, it is a relatively safe deal because your property is technically acting as collateral, and what’s more, they also get to earn interest from the amount you’ve overdrawn.
Why do people utilise it in their home loans?
There are many reasons, and here are a few common ones:
- It is a fast and convenient option to gain access to fund without having to apply for a loan.
- It allows one to unlock the equity of a not-yet-fully-paid property for various purposes, such as investment.
- A protection mechanism that allows quick access to funds in case of emergencies.
Is overdraft in a home loan worth using?
Different financial institutions offer different terms and conditions for their property loans therefore, there isn’t any sure-fire answer as to whether you should or should not use that overdraft facility attached to your home loan.
But as we’ve always professed, comparison is the key.
Like any other means of accessing money you don’t have from the banks, using the facility on your housing loan commands fees and charges. It is to your interest to find out what they are and then compare them with those of other financial vehicles you’re currently using, such as personal loans and credit cards. When you’ve done the math, you will know for certain if it is worth your while!